Attorney General Becerra Leads Multistate Coalition Objecting to SEC Proposal to Reduce Investor Protections

SACRAMENTO – Attorney General Xavier Becerra today led a multistate coalition of 11 attorneys general in filing a comment letter objecting to the Securities and Exchange Commission’s (SEC) proposed rule that would significantly diminish protections for individual investors. The rule would expand the SEC’s definition of “accredited investors” to include an increased number of individuals who are not equipped to bear significant losses from non-transparent and risky private non-publicly traded offerings. Additionally, the rule fails to account for almost 40 years of inflation by keeping the same financial thresholds to determine accredited investor status as existed in the 1980s. Doing so leaves millions of investors, including many seniors, at unnecessary risk.
 
“We oppose the SEC’s rule because it puts the interest of corporations looking to evade transparency and oversight over the safety of individual investors,” said Attorney General Becerra. “The SEC’s proposed rule would make it more likely that hardworking people who, for their entire lives, save for retirement will unwittingly risk losing it all in private offerings where the protections of securities laws do not apply. All it takes is one bad investment to crush a family or put an individual into financial distress. The SEC should be in the business of protecting these hardworking families who prudently save enough to invest in their retirement, not in stacking the deck against them.”
 
In addition to failing to index financial thresholds to inflation, the SEC proposes allowing individuals who have been advised by a broker-dealer or an investment advisor to qualify as accredited investors, despite evidence that broker-dealers and investment advisors who recommend private offerings are more likely to have conflicts of interest than those who advise in public offerings. An accredited investor is an investor that companies can solicit with no requirement to provide disclosures about an investment. Furthermore, the rule seeks to expand the accredited investor definition to include individuals with qualifications that the SEC unilaterally — and without accountability — deems appropriate.
 
The coalition opposes SEC’s proposed rule and advocates for the SEC instead to consider the following recommendations:

• The SEC should raise the “accredited investor” financial thresholds set in the 1980s to account for inflation and should adjust the thresholds at least every four years going forward;
• Before making any changes to expand the “accredited investor” definition, the SEC should gather data and actually study private securities offerings, including outcomes for issuers and investors; 
• In light of the significant evidence that individual investors are likely to be injured, the SEC should reject any proposal to allow individuals advised by broker-dealers or investment advisors to qualify as accredited investors; and
• The SEC should abandon the the proposed rule’s structure, which allows the SEC to decide the qualifications for accredited investors in the future without notice to and comment from stakeholders.

Attorney General Becerra is committed to protecting investors. In September 2019, Attorney General Becerra filed a joint lawsuit challenging the SEC’s so-called Best Interest Rule, which would allow broker-dealers to continue promoting investments that better compensate them at the expense of the best interests of their customers. That same month, he submitted a comment letter objecting to an SEC Concept Release advocating expanding exemptions for private offerings. In July 2019, Attorney General Becerra announced a 17-year jail sentence against an El Dorado Hills man who solicited more than $2 million from elderly investors under false pretenses. And in April 2019, he announced a $150 million settlement against Morgan Stanley for misleading investors, including California’s teachers and public employees.

In submitting the comment letter, Attorney General Becerra is joined by the attorneys general of Connecticut, Delaware, Illinois, Iowa, Maryland, Massachusetts, New Jersey, New Mexico, New York, and Oregon.

A copy of the comment letter is available here.